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Coronavirus could drain Michigan unemployment fund within months

The crush of 1 million new claims is rapidly depleting Michigan’s unemployment fund, which could force the state to borrow money. Jobless workers would still get checks, but Michigan may have to raise business taxes to repay the debt, slowing any recovery. (Shutterstock)

Michigan could run out of cash within months to pay all the unemployment it has promised workers idled by the coronavirus, and businesses fear taxes may have to increase to fill the hole.

The Michigan Unemployment Trust Fund will be drained within two months and incur as much as a $15 billion deficit, predicts Christopher O’Leary, a senior economist specializing in labor markets at the Upjohn Institute in Kalamazoo.

Michigan’s jobless workers would still get their full unemployment checks. But the state would have to borrow to cover the shortfall — and potentially repay it with increased business taxes that could slow the recovery from the COVID-19 crisis.

Gov. Gretchen Whitmer acknowledged the problem in an interview with Bridge on Tuesday, but said the state has been largely preoccupied by repairing system outages and enrollment logjams from 1 million unemployment claims in the past month.

“We’re looking at it,” Whitmer said of the unemployment shortfall. “We’re mindful of the need. The federal government is working to make sure that we’ve got the resources to meet those needs as well.”

The situation comes even though Michigan had the nation’s third-highest unemployment reserve in the nation, about $4.6 billion at the end of 2019, according to a March 31 Michigan Senate Fiscal Agency memo.

Now, state officials say a worst-case scenario calls for the fund to be drained in July, said Jason Moon, communications director for the Michigan Department of Labor and Economic Opportunity.

The federal coronavirus bailout package, the CARES Act, will grant states interest-free loans to cover unemployment shortfalls through the year-end, according to the Washington, D.C.-based Tax Foundation.

So while there’s a short-term solution to the shortfall, by next year the state’s employers may face higher unemployment taxes as they try to dig out of a likely recession caused by the virus.

In one scenario, the taxes would have to double to repay the bonds, leaving less money for businesses to rehire workers or invest in equipment after the crisis eventually passes.

“Ultimately, businesses and workers will have to pay it back,” O’Leary said

And the slowdown from the coronavirus has just begun: Nearly 1 in 4 of Michigan’s 4.76 million workers have filed for unemployment since mid-March. The University of Michigan expects a total of 1.2 million lost jobs by the second quarter, peaking in May as workers exhaust paid time off.

Job loss reversals — and workers leaving the unemployment system — won’t start until summer, according to the U-M economists, in an “optimistic” outlook. Many jobs may not be regained until the end of 2022, they forecast, signaling a years-long recovery.

“We haven’t seen the peak of this,” Jeff Donofrio, director of the Michigan Department of Labor and Economic Opportunity, said Tuesday.

Much uncertainty

By the time the pandemic hit the United States, Michigan was one of 31 states operating unemployment trusts considered solvent. Six states, including California, have fewer than 10 weeks of funding for jobless claims, the Tax Foundation reports.

At the end of March, Michigan Senate analysts concluded the unemployment fund could cover $176.7 million per week for 26 weeks and remain solvent. But Michigan’s skyrocketing claims mean the fund could now pay out $100 million more than than that per week.

And the system is facing new pressures.

In March, Whitmer extended jobless benefits from 20 to 26 weeks and added an eligibility for new classes of workers, like those in the “gig” economy. Less money is going into the system not only because businesses now have fewer employees, but because a Whitmer executive order caps the total unemployment insurance taxes assessed on employers, according to a Senate Fiscal Agency memo.

O’Leary analyzed reserves and the trajectory of unemployment claims to predict the state needs $20 billion to cover payments. The rough estimate — $15 billion more than the state has on hand — comes with many variables, O’Leary added.

“There is a high degree of uncertainty over the duration of the work stoppage or re-stoppage, so the actual value could be significantly above or below this estimate,” he said.

Balancing act

Funding the unemployment trust fund can be complicated and politically charged. It is fed by payroll tax paid by employers. In 2017-18, about $1.2 billion went into Michigan’s fund.

“There’s a balancing act,” said Eric Lupher, president of the Citizens Research Council of Michigan. “It’s balancing the risks of deep recession and providing benefits, and how much money you’re taking out the economy by doing so. That’s money those businesses could be spending on capital improvement, or active labor, or other things.”

Over decades, Lupher said, Michigan has often found itself without an unemployment fund that is sufficient for manufacturing-driven economic downturns. “We have a pattern of borrowing and paying back,” he said.

In 1982, the state Legislature initiated a four-year plan to repay $2.2 billion in unemployment debt stemming from recession. That followed $624 million in borrowing in the 1970s. By August 2010, Michigan had borrowed $3.8 billion to cover unemployment payments during the Great Recession. In 2011, employers had to pay an additional $240 million into the fund.

O’Leary cautioned, “annual tax rates for contributing Michigan employers would probably double” if the state needs to seek a federal loan that isn’t covered by the interest-free provisions.

Municipal bond financing also is an option if the state needs more unemployment funding beyond this year. That option was used a decade ago, with the most recent one only recently retired.

Either way, Lupher said, tough policy decisions are coming when the pandemic passes and the state has to decide how to fund its unemployment trust to rebuild it and prepare for the next downturn.

“There is no magic solution,” he said. “People’s lives are at stake. Businesses are at stake.”

Businesses are concerned about the unemployment hangover to come. Already fixated on trying to reopen, many businesses are wondering how to rebuild if they face a higher tax burden, said Wendy Block, vice president of business advocacy at the Michigan Chamber of Commerce.

“The system is 100-percent employer financed,” Block said. “If the system goes into the red, employer taxes will need to be increased to repay that debt.”

Block said the state chamber understands Michigan’s unemployment system is overwhelmed, so it plans to lobby Michigan’s congressional delegation for more federal relief.

The current worst-case scenario is not what any unemployment system plans for, Lupher said, noting that past methods of repaying unemployment fund debts “is almost the reverse of economic development.”

“But it is what it is at this point,” he said. “We’re not going to change it in time to make a difference in this go-round.”

The state of Michigan has frozen 340,000 unemployment accounts, blocking cash assistance for jobless residents while it investigates suspected fraud by imposters seeking to take advantage of enhanced benefits during the COVID-19 pandemic, officials said Friday.

Gov. Gretchen Whitmer is utilizing a federal “work share” program to furlough state employees one day per week. Because of federal benefits, many state workers will earn more than they would have working five days per week.

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We have been spending the shutdown making a list of houses out of state that we will be looking at after this - When it's over, we are out of here. Already have an interested party in the house. This state is going to crash so bad.

This might come as a shock to you numptys, but every state is going to crash. The old world is dead (and good riddance to it); traipse off to Florida if you like, but you can't outrun the collapse of this decrepit system

Funny thing is that even though the governor of Florida is incompetent like the president, city and county leaders (read mostly Democrats) are doing the right thing with local stay at home orders. In fact, some of the snowflakes up in arms here in Michigan would be very unhappy in Florida where there are 9PM curfews for everyone. Take that you ignorant unpatriotic armchair militants. You can go park your cars and honk your horns all you want in Lansing, but your little theatrics are doing NOTHING to help with this crisis. You are making it worse, in every respect.

I think that it is safe to say that what ernie was commenting above is the fact that supporters of the governor have to resort to using outright lies and falsehoods because people are no longer buying what she is telling us. Yesterday's rally should easily corroborate that.

I'm sure that ernie will interject if this is any different.

This is something that could have been easily verified with about 10 seconds of work.

TANSTAAFL means "here is no such thing as a free lunch," and it comes from Robert Heinlein's 1966 science-fiction novel The Moon Is a Harsh Mistress. Basically what it means is that there is an opportunity cost to shutting down Michigan the way that the Governor did. Making decisions requires trading off one goal against another. The Governor shut down Michigan and so the results of that policy are hers- the failure to slow the virus and the failure of the economic devastation. Some people commenting on this website act as if she can not be blamed for any of the bad effects of her policies and yet she gets to claim all of the good from her policies- the kind of "heads she wins, tails she wins" sort of illogic that only partisan hacks employ. But Kevin is correct- TANSTAAFL.

Much if this issue could be avoided if the Governor would simply use common sense. A great example would be to permit business that have minimal personal contact to go back to work. Landscape companies should be able to go back to work, they can easily work at a very comfortable social distance. It seems our Governor would rather see the 85 year old widow out there struggling to mow her own lawn! Governor Witless is an embarrassment who hates the people and economy of Michigan. She is putting politics ahead of the people. Notice she “permits” alcohol, pot, lottery sales and that is all the proof you need to see she is not making decisions based upon “needed to sustain life”.

"Notice she 'permits' alcohol, pot, lottery sales and that is all the proof you need to see she is not making decisions based upon 'needed to sustain life'.” THOSE are NECESSITIES to deal with GOP dotes who choose to do NOTHING, but continue to spread the virus and DO nothing productive. Such whiners!

Mark - It won't be just a little bit. The $2 Trillion Cares Act intended to provide a safety net for low to middle income people, and a bailout to states and businesses, is 1/10th of our Gross Domestic Amount (pre coronavirus crash). That is an enormous amount for the federal government to have to borrow. And you are right, raising taxes and going into debt are certainly acceptable and called for in times like this, or like during WW II as you note. But the fiscal irresponsibility (whether expenditure or revenue based) at the federal level will cause this crisis to be much worse. Despite how (comparatively) good our economy was, we were at our highest levels of debt and deficit at the federal levels. I am not a political fiscal conservative or socialist, but this is not going to be a small blip that we will recover from. And if we lose our ability to export because our industries are shut down, guess who will be there to fill the void behind our manufacturers.

All what I said repeatedly about these draconian orders the Governor issued sidelining a huge amount of the Michigan workforce has consequences. We could have kept many more businesses operating by just applying Trump's CDC guidelines, but instead has damage peoples livelihoods, businesses and even destroyed some of both permanently that were just hanging on prior to all of this. And now will cost our state economically with higher taxes without proof all of that has been done has stopped or really slow down spread as this is a cold/flu virus. We can do our part in a practical way but are we God that we think we micro manage everyone's life?

Covid19 which was already probable been here since early winter, has been made into a crisis which will just cripple this state and the USA on a whole in the future, because everything has consequences. The growing numbers of fact based stats and studies that are coming out now are not proving the "crisis" in this, but the truth always eventually surfaces if people like to hear it or not. You should avoid people who are sick and it doesn't help if your not a healthy person or obese or smoked your head off most of your life or old or medical comprised you should always use common sense to avoid getting sick as you should from any other kind of virus. But some of the hospitalizations and deaths are somewhat consequences to behavior and others regrettable part of mortality that has always existed.

Wait until the stats come out about the self employed, independent contractors and gig workers that have signed on to unemployment in our state. It will not be unreasonable to assume that 1 out of every 6 people, or worse, who were working before are now not working. And government money can not replace what people are willing to work for and gather through their own labor to spend, either morally or financially. This is really beyond name calling it is going to be very tragic, something when looking back if they are honest (who's honest these days?) wished they hadn't pursued trying to remedy this the way they did. The job losses are not over either where is the money going to come from to fuel the economy which the article as a side note can't help but leave you thinking. It going to be a big problem.

If this article is true can you imagine how many people have been put out of work in Michigan and on the unemployment rolls because top collection benefit pays only $362.00 to my understanding and the average pay out is a little over $200. According to this article they are or will be paying approx. $277 million a week. Can you imagine and the 4.4 billion fund will be broke by July. This doesn't include I don't think the self-employed, independent contractors and all the new enrollee's being paid by PUA, I think the pandemic unemployment is being paid out of federal money. But still, maybe another million out of work in Michigan and was not being able to be counted until they were allowed to start signing up this last monday the 13th.What I don't understand are the people who cheer this destruction on when reading comments in other articles and then run and stand behind covid like it is some moral stance to destroy everything else, seriously where are people's common sense!

Unemployment insurance appears to be another government ponzi scheme.The true issue being avoided is the reality that too many people live week to week. These people enjoy all their pay and do not save and expect unemployment benefits to allow them to live as usual when their job is gone.I am 81. I was fired at age 58. Never had to work again. Had saved and invested. Raised 3 kids. All now doing well. Wife and I paid forward for all 6 grandkids to go to college. But we now still drive her 99 Taurus and my 05 Silverado. Yes, we could have a Cadillac... but we do not "need" a Caddy .... we just need transportation. Unemployment insurance simply adds a hidden cost to all products and services. We avoid paying that to a degree by not buying a new car. We get Social Security. If I could have not paid for that ponzi scheme either I could have invested that $$ too and would even be better off than we are now. S.S. hurts really bad.... but not many realize that fact.I could go on but since none of the Bridge heroes apparently fact checks these comments I doubt I will write more.In parting, check the Fed tax form 990 of Bridge... yes the head guy gets paid about a quarter million a year..Check it out.... a 43 page form you can easily find.

"Before the virus hit, America’s unemployment rate was 3.5 percent, the lowest in 50 years. Now Goldman Sachs predicts unemployment could spike to 15 percent by midyear. A St. Louis Federal Reserve economist grimly predicts 32 percent unemployment — worse than during the Great Depression.

Job losses cause extreme suffering. Every 1 percent hike in the unemployment rate will likely produce a 3.3 percent increase in drug-overdose deaths and a 0.99 percent increase in suicides, according to data from the National Bureau of Economic Research and the medical journal Lancet.

These are facts based on past experience, not models. If unemployment hits 32 percent, some 77,000 Americans are likely to die from suicide and drug overdoses as a result of layoffs. Deaths of despair."

To repeat, based on past experience, the government mandated economic shutdown will lead to almost 80K more deaths, which is more than the virus is now projected to kill. The greatest threat to American lives is the shut down. End it.

Who made the decision to make us all stop working over a virus that we have meds for? Make her replenish the unemployment fund. Unbelievable that we are FORCED to stop working and now will be FORCED to replenish the unemployment fund because you know that's what's coming. Once again, the hard working Americans carry the burden for a stupid decision made by a governor who has risen to a level of incompetency. #recallwhitmer

Who made the decision to make us all stop working over a virus that we have meds for? Make her replenish the unemployment fund. Unbelievable that we are FORCED to stop working and now will be FORCED to replenish the unemployment fund because you know that's what's coming. Once again, the hard working Americans carry the burden for a stupid decision made by a governor who has risen to a level of incompetency. #recallwhitmer

How is it that we have had record low unemployment levels for the past few years and the States unemployment fund is still under $5 million. In 2013, the reserve was somewhere north of $14 Million. Where did all this go?

Is this fund protected from raiding for other state 'priorities' or is it being used as a slush fund like Social Security has been by the Federal Government? I don't know. I thought things were great under our last president, or so we were told. How could our unemployment fund get reduced by almost $10 Billion dollars if they were so good?